Global Asset Tracker: Macro mega trends strike chord with wealthy clients
The world is witnessing a period of fast, unprecedented change, which is offering investors a fertile hunting ground for investments driven by long term, mega trends, believed to be powerful transformative forces likely to impact all of our lives and every sector of the global economy.
Increasingly, private banks are adopting a top-down, cross-sector investment approach to build client portfolios. This focuses on broader, macroeconomic themes, aimed at identifying businesses that will benefit from these trends and deliver above average growth over the long term.
Blurring boundaries between sectors is helping drive growth of thematic investing, says Willem Sels, chief market strategist at HSBC Private Banking. “Technology has permeated all sectors. Is Amazon a retail or technology company?” Similarly, there are no clear lines between some telecom, entertainment or technology firms.
“As sector analysis and sector boundaries blur, there is more and more interest in thematic investing,” he adds.
Almost 80 per cent of private banks participating in PWM’s 2019 Global Asset Tracker survey see growing client demand for thematic investing, and more than 90 per cent implement at least a handful of investment themes in client portfolios.
Moreover, there is widespread consensus that thematic investing enables private bankers to better engage with clients, capturing their imagination. “Several themes really speak to clients, as they are about longer-term trends, and how the world is systematically changing,” adds Mr Sels.
Popular plays
The most popular themes are those favouring digitalisation, technology and automation/robotics. Investments around ageing demographics, growth of middle class and domestic consumption, particularly in emerging economies, are also extremely popular.
“One of the themes we focus on is longevity,” says Jeffrey Sacks, head of Emea Investment Strategy at Citi Private Bank.
“People are living longer, so the healthcare sector is seeing a significant pick-up.” Also, the sector tends to be quite resilient in a downturn, as it tends to perform well, in earnings terms, even in a recession. “It’s a long term theme, which should do well when the cycle eventually ends,” he says.
Growing concerns about the end of the economic cycle have attracted client interest to themes which seek to identify businesses expected to better weather a market downturn, explains Cesar Perez, Pictet’s CIO.
One of them, identified as “democracy recession”, relates to the rise of populist movements and their fight for better living standards. Such a trend is evident, for example, in French president Emmanuel Macron’s decision to raise minimum wages, following gilet jaunes’ violent protests, according to Pictet.
This means companies are starting to suffer from higher costs, due to tight labour markets, and higher interest rates. “A big investment theme for the next few years is around trying to differentiate which companies have pricing power versus the ones that don’t,” says Mr Perez.
“Business are often unable to pass the increase in cost to final consumers, so if within each sector you identify companies that have pricing power and higher margins than their sector average, through the cycle, you can construct very nice portfolios, which are going to outperform, over the long run, independent of volatility.”
Another investment theme shaping stock picking strategies at Pictet is focused on identifying companies that show structural growth drivers or sustainable growth, independent of the cycle. The market never tends to price in long-term growth, which makes this theme attractive, adds Mr Perez.
Pictet partners with venture capitalists and private equity managers to identify, at an early stage, businesses across sectors expected to succeed, in a world where technology is a huge disruptor and “the winner takes it all”.
These new themes are popular with client entrepreneurs, whose businesses may have been challenged by disrupting firms, or who can feel cost pressure on their companies, says Mr Perez.
Credit Suisse launched its ‘supertrends’ to link significant societal changes to tangible investment opportunities, explains Daniel Rupli, head of Single Security Research and member of the Investment Themes Committee at the global bank.
These long-term investment themes include “Silver economy – investing for population ageing” and “Millennials’ values”, which address simultaneous demographic trends of population ageing and gradual generational shift to millennials.
Other themes such as “Angry societies - multipolar world” and “Infrastructure - closing the gap” are rooted in the bank’s interpretation of global political developments and economic policies.
“Technology at the service of humans,” represents the bank’s growth conviction. “We are merely at the beginning of a new era, and continue to believe a focus on technology that is helpful, rather than harmful for the society, is the right one, given many areas of technology have been subject to controversy, regulatory scrutiny or even customer rejection,” says Mr Rupli.
Sub-themes
Each supertrend is played through sub-themes, offering a much wider diversification approach, he explains. For example, the silver economy theme invests not only in healthcare, but also financials, including asset managers and life insurers.
It also finds investment opportunities in real estate, focusing on senior housing and care facilities, and parts of the consumer sector expected to grow to meet rising demand for senior lifestyle.
“Supertrends should benefit from attractive longer-term, more sustainable growth, experiencing lower volatility longer-term,” adds Mr Rupli. “Timing is less relevant for entering an investment, if investors target a multi-year investment horizon. A long-term trend also allows a staggered investment approach which reduces the timing risk.”
